March 22, 2014

Discover Financial Services Faces Student-Loan Probe

Discover Financial Services DFS -1.63% is facing a government probe over its student-loan business, the consumer lender said in a regulatory filing Tuesday.

The Consumer Financial Protection Bureau has issued Discover a civil investigative demand seeking documents and other information regarding the student-loan-servicing practices of Discover Bank, the company's banking subsidiary, the filing said.

Separately, Discover also said the Federal Deposit Insurance Corp. has notified the company of possible "deficiencies" in Discover Bank's program for anti-money-laundering and Bank Secrecy Act measures.

Discover said it is cooperating with both agencies and warned that it could face civil penalties and be asked to change its business practices if either regulator files an enforcement action against the company. The lender may also be forced to refund money to customers in the student-loan-servicing matter.

A spokesman for the Riverwoods, Ill.-based company didn't immediately respond to requests for comment on Tuesday.

The student-loan probe comes amid a broader investigation by state and federal regulators of student-lending practices.

In December, the CFPB said it was expanding its monitoring of student-loan servicers, which collect payments from and handle billing for borrowers, to the largest nonbank servicers. The agency already oversees servicing by banks.

The agency and consumer advocates have raised concerns that student-loan servicers have in some cases failed to properly credit borrowers' payments and charged improper fees.

Illinois Attorney General Lisa Madigan is leading a multistate investigation of student lender SLM Corp SLM +0.86% . that focuses on the firm's debt collection, loan servicing and other practices, a spokeswoman for Ms. Madigan said last week.

Discover has expanded beyond its core business of credit-card lending in recent years in a bid to grow its revenue, adding student loans, mortgages and other products for consumers. The company is one of the largest providers of private student loans.

In its filing Tuesday, Discover also noted that fraud-related losses associated with merchants, customers and other third-parties have continued to rise.

Fraud losses were $110 million the last calendar year, up from $93 million in the fiscal year ended Nov. 30, 2012, and $72 million in the fiscal year ended Nov. 30, 2011

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